Compensation for loss due to illegal prohibition decision - latest position

The European Court of Justice (ECJ) has published the opinion of Advocate General Ruiz-Jarabo on the question of whether the European Commission should compensate Schneider Electric for €1.7 billion of loss arising from the Commission’s illegal prohibition of Schneider’s acquisition of Legrand.

The Advocate General believes that the European Commission ought solely to pay compensation to Schneider to cover costs incurred by it in its participation in the recommenced investigation of the transaction. While the Advocate General’s opinion is not binding on the ECJ, these opinions are very often followed. The Advocate General has disagreed with the Court of First Instance, which found in July 2007 that Schneider should additionally be compensated for the reduction in sale price of Legrand which Schneider had to concede to Wendel KKR in order to obtain postponement of the sale while Schneider was waiting for the outcome of the resumed merger control procedure (click here to see our earlier law now on this case).

The timeline and facts of this case are complicated. In summary, the European Commission prohibited the original acquisition, which had already been completed (relying on an exemption allowing completion of a public bid before the Commission had completed its merger review). The Commission’s prohibition of the acquisition was accompanied by an obligation on Schneider to divest Legrand. Schneider entered into an agreement to divest Legrand to Wendel KKR. Subsequently, the original prohibition decision was annulled (and with it the divestment obligation).

The Commission commenced a second investigation of the transaction and informed Schneider that it still had concerns about the transaction. Schneider submitted undertakings designed to remedy the concerns, but the Commission did not feel these were acceptable. Schneider decided to continue with the divestment of Legrand to Wendel KKR. The Commission closed this (second) investigation following the divestment. Schneider later claimed damages from the European Commission for the loss it claimed it had sustained because of the illegality of the prohibition decision - for more details of chronology see the ECJ's press release in this case.

The main point from the Advocate General’s opinion is that he believes that Schneider's loss does not directly, immediately and exclusively arise from the Commission's unlawful act (the prohibition of the Schneider/Legrand acquisition), as a matter of causation.

The Advocate General’s views included:

• The reduction in the sale price of Legrand (when Schneider was obliged to sell Legrand following the prohibition decision) is not a consequence of the prohibition decision being declared invalid, but is a matter of Schneider's own free choice in its dealings with the other business
• The divestment obligation (later declared invalid) was only the background and had no direct influence on the terms of the sale purchase agreement for the sale of Legrand to Wendel KKR
• Schneider finalised the agreement to divest Legrand to Wendel KKR well before the expiry of the period allowed by the Commission to do so. The Advocate General believes that this action fuels the suspicion that Schneider intended to give priority to the transaction with Wendel KKR. He added that this view is strengthened by the fact that Schneider did not pursue the Commission’s second investigation to the bitter end, preferring to implement the divestment agreement with Wendel KKR
• The Advocate General notes that Schneider took a considerable risk by relying on one of the exceptions to the EC Merger Regulation to allow it to complete its original purchase of Legrand before the Commission had completed its investigation of the transaction. He believes that the risks assumed by companies relying on such exceptions "include the normal vicissitudes associated with mergers". In his view, to award compensation in this situation would provide those relying on an exception to implement a merger before a Commission ruling with a guarantee or insurance against additional costs arising in similar circumstances
• Finally, the Advocate General also believes that there was insufficient causal link between the invalidity of the prohibition decision and the loss caused by the reduced price for sale of Legrand to Wendel KKR by selling Legrand when it was not obliged to do so and by not acting with due diligence. In his opinion, when Schneider implemented the divestment of Legrand, it was solely bound by its contract with Wendel KKR, since the prohibition decision and divestment requirement had been annulled.

Consequently, the completion of the sale was, to the Advocate General’s mind, a matter of free choice. The Advocate General believes Schneider did not act with due diligence since it disregarded a provision in the contract with Wendel KKR which allowed cancellation of the contract upon payment of a break fee of €180 million. The Advocate General believes that on the assumption that Schneider still wanted to complete the merger with Legrand, it would have been more logical for Schneider to withdraw from the sale to Wendel KKR and pay the €180 million fee, rather than suffer the loss claimed

The European Commission would be pleased to see the ECJ follow this opinion for obvious reasons. However, Schneider might in that case feel aggrieved that in the face of continued opposition to its deal in a second in-depth investigation, it bowed to what the Commission clearly wanted to happen, only to have this backfire once the CFI annulled the original prohibition decision.